Unenforceable Contracts: What to Watch Out For

A contract is a legally binding agreement. As a result, in the typical scenario, once you enter into a contract with another person or business, you and the other party are both expected to fulfill the terms of the contract. But it's possible for an otherwise valid contract to be found unenforceable in the eyes of the law.

Contract law recognizes certain defenses to enforcing a contract. If you qualify for one of these defenses, you don't have to fulfill your end of the contract.

What Is an Enforceable Contract?

A contract must satisfy particular elements to be an enforceable contract. Specifically, a contract must:

• consist of a valid offer and acceptance
• have consideration
• have a legal purpose, and
• be between capable, mutually assenting parties.

Depending on the type of contract, you might need to satisfy other elements. For example, your state's contract laws might require your agreement to be in writing to be enforceable.

As long as your contract meets the required elements and there's no legal reason not to enforce the contract, the contract will be enforceable.

You can learn more about what an enforceable contract is in our article about the requirements of a legally binding contract.

Unenforceable Contracts and Voidable Contracts

In general, you don't have to fulfill your side of a contract when:

• one of the required contract elements (mentioned above) isn't met, or
• enforcement is against public policy.

Oftentimes, people will refer to unenforceable (also called "void") and voidable contracts as simply "unenforceable." However, there's a slight distinction between unenforceable contracts and voidable contracts.

Unenforceable contract: An "unenforceable contract" is one where the contract is invalid from the beginning. For example, a contract with a minor is unenforceable from the start because minors lack the capacity to contract.

Voidable contract: A "voidable contract" is one that can be fixed by an act or confirmation of one of the parties. For instance, suppose you've agreed to pay a contractor $10,000 to install wood flooring in your shop. But the contractor installs carpet flooring. You can probably legally void the contract due to this material breach. However, the contractor could fix the issue and install the correct flooring. In that case, the contract is voidable but not void (or unenforceable).

For the most part, it's only important to identify contract defenses—valid reasons for not fulfilling your side of the contract. These defenses can be related to unenforceable and voidable contracts. In either case, you can get out of your contractual obligations as long as you have a valid defense.

Contract Defenses

The following are common defenses to contract enforcement:

• one of the parties lacked the capacity to contract
• one of the parties was under duress when they agreed to the contract
• one of the parties exerted undue influence over the other party
• one of the parties misrepresented the terms or conditions of the contract
• one of the parties didn't disclose an important fact or detail to the other party
• one or both parties made a mistake about something related to the contract
• enforcement of the contract is unconscionable
• enforcement of the contract is against public policy, and
• performance of the contract is impossible.

Your state's laws might differ from other states on how these defenses are applied. For example, your state might have a different definition of "undue influence" than another state.

In addition, your contract might have remedies or instructions for how to end the contract in the event that one of these defenses becomes applicable. While some contracts are unenforceable no matter what the contract says, other contracts might require you to follow a particular procedure to cancel the contract.

Let's discuss these common contractual defenses in more detail.

Lack of Capacity to Contract

It's expected that both (or all) parties to a contract have the ability to understand exactly what it is they're agreeing to. If it appears that one side didn't have this reasoning capacity, the contract can be held unenforceable.

Typically, a person will be considered to lack the capacity to contract when they:

• are a minor under the age of 18
• lack the mental capacity, or
• are seriously intoxicated or under the influence and the other side knows this fact.

The general idea here is to prevent an unscrupulous person from taking advantage of someone who lacks the ability to make a reasoned decision.

To learn more about this element and defense, read our article on who lacks the capacity to contract.

Contracting Party Under Duress

Duress, or coercion, will invalidate a contract when someone is threatened into making the agreement. Specifically, "duress" is an improper threat or wrongful act that deprives a person of a meaningful choice to contract. In other words, duress happens when the person agrees to a contract they wouldn't otherwise agree to because they had no reasonable alternative.

Typically, an improper threat can be:

• physical, or
• economic.

For example, suppose Turtle Transport, Inc., a shipper, agrees to transport materials for another company, Dolphin Development LLC, which would be used in a major development project. After Dolphin Development's project is underway and Turtle Transport's ship is en route with the materials, Turtle Transport refuses to complete the trip unless Dolphin Development agrees to pay a higher price.

Dolphin Development is forced to pay the increased rate because there's no other way to get the material, and not completing the job would lead to unsustainable losses. In this case, the court would likely find that the agreement to raise the price isn't enforceable because it came about through economic duress. Turtle Transport threatened not to complete the trip and Dolphin Development was left with no reasonable alternative.

Another common example of duress is blackmail. Duress can also include imprisonment, confinement, or unlawfully taking a person's property.

Undue Influence

Undue influence is similar to duress. "Undue influence" is when one side puts intense sales pressure on a susceptible party. Typically, undue influence requires the parties to have a pre-existing relationship where the party applying the sales pressure has power or authority over the susceptible party.

The susceptible party could rely on or depend on the influencing party like in a parent-child or caregiver-patient relationship. Alternatively, the susceptible party could trust the influencing party such as in a therapist-patient or pastor-congregant relationship or another confidential relationship.

In general, a court considers these four elements when deciding whether there was undue influence:

• the victim's vulnerability
• the influencer's authority
• the tactics the influencer used to convince the victim, and
• the inequity of the results of the contract.

For example, suppose you own the majority of shares in a corporation. However, due to an accident, you become entirely dependent on your caregiver. Your caregiver, recognizing the opportunity, convinces you to sign over all your shares to them for $1, well below the stock value. You could likely void the contract and argue undue influence due to the power dynamic and inequity of the exchange.

Misrepresentation

If fraud or misrepresentation occurs during the negotiation process, any resulting contract will probably be held unenforceable. The idea here is to encourage honest, good-faith bargaining and transactions.

Misrepresentations commonly occur when a party either:

• says something false (such as telling a potential buyer that a warehouse is termite-free when it's not), or
• in some way, conceals or misrepresents a state of affairs (like concealing evidence of structural damage in a shop's foundation with paint or a particular placement of furniture).

A type of misrepresentation is nondisclosure.

Nondisclosure of Material Facts

"Nondisclosure" is essentially misrepresentation through silence—when someone neglects to disclose an important fact about the deal. Courts look at various issues to decide whether a party has a duty to disclose the information. But courts will also consider whether the other party could or should have easily been able to access the same information.

It should be noted that parties have a duty to disclose only material facts. But if one side specifically asks the other side about a fact (material or nonmaterial), the other side must disclose the truth.

For example, suppose you want to purchase a refrigerated van for your catering business. The seller doesn't reveal that the refrigerated van you're interested in buying has been having serious difficulties with its refrigeration system. Because the refrigeration system is essential to the van's usability, the system's state would be a material fact. You can likely void the contract due to nondisclosure.

One or Both Parties Make a Mistake

Sometimes a contract is unenforceable not because of purposeful bad faith by one party, but due to a mistake of a present fact. The mistake can be on the part of one party (called a "unilateral mistake") or both parties (called a "mutual mistake").

In the case of either a unilateral or mutual mistake, you must prove:

• the mistake was about a basic assumption of the contract
• the mistake had a material (significant) effect on the exchange or bargaining process, and
• the adversely affected party couldn't have assumed the risk of the mistake.

With a unilateral mistake, you must also prove that the mistake either made the contract unconscionable (see below) or that the other side knew, had reason to know, or caused the mistake.

Unconscionability

"Unconscionability" means that a term in the contract or something inherent in or about the agreement was so shockingly unfair that the contract simply can't be allowed to stand as is. Put in fewer words, unconscionability is when the contract shocks the conscience. This element can be procedural (a defect in the bargaining process) or substantive (a rip-off).

The idea here again is to ensure fairness, so a court will consider whether:

• one side has grossly unequal bargaining power
• one side had difficulty understanding the terms of the agreement (due to language or literacy issues, for example), or
• the terms themselves were unfair (like sky-high arbitration costs).

If a court does find a contract unconscionable, it has options other than just voiding the agreement altogether. The court can instead choose to enforce the conscionable parts of the contract and rewrite the unconscionable term or clause, for example.

Public Policy

Contracts can be found unenforceable on grounds of public policy. In this case, the contract is unenforceable not only to protect one of the parties involved but also because what the contract represents could pose harm to society as a whole.

For example, a court will never enforce a contract promoting something already against state or federal law (you can never enforce a contract for an illegal marijuana sale) or an agreement that offends the "public sensibilities" (contracts involving some sort of sexual immorality, for example).

Other examples of contracts (or contracts clauses) that are against public policy and therefore unenforceable include:

• an employer forcing an employee to sign a contract that forbids workers from joining a union
• an employer forcing an employee to sign a contract forbidding medical leave, and
• a landlord forcing a tenant to sign a contract forbidding medically necessary companion animals such as seeing eye dogs.

Impossibility

In some cases, a contract is deemed unenforceable because it would be impossible or impracticable to carry out its terms—too difficult or too expensive, for example. To claim impossibility, you would need to show that:

• you can't complete performance under the contract because of some unexpected event that's not your fault
• the contract didn't make the risk of the unexpected event something you needed to shoulder, and
• performing the contract will be much more difficult or expensive now.

For example, suppose your company contracts to sell 20 barrels of its flour to a restaurant chain. But a natural disaster wipes out your entire stock of flour before the sale can be completed. You might be able to have the contract ruled unenforceable on grounds of impossibility.

You can also explicitly protect yourself from such unexpected events using a force majeure clause in your contract.

Additional Help With Contracts

Perhaps you're part of a contract that's gone wrong or it was never right from the beginning. You and the other side might be able to work things out with little difficulty. Perhaps you move back a delivery date or amend the contract in some other way to make it fair, practical, and enforceable. But if you can't reach a new agreement or you want out of a contract and the other side is being unreasonable, consider reaching out to a contracts attorney. They can help you negotiate with the other side and understand your rights and options.

If you'd like to read more on contracts, check out our book Contracts: The Essential Business Desk Reference, by Richard Stim (Nolo). It has information about contract terms and negotiating strategies as well as sample contracts.